In These New Times

A new paradigm for a post-imperial world

Eurozone: concrete steps towards growth

Posted by seumasach on May 8, 2012

New Europe

8th May, 2012

On Tuesday 8 May in Athens, amidst the political turbulences that the results of Sunday’s election brought to the country, it was very interesting to watch the Greek Treasury raising easily €1.3 billion in T-Bills at an only slightly increased interest rate.

The interest cost was formed at just 14 basic points higher at 4.69%, instead of 4.55% one month earlier.

The debt paper issue was easily covered by offers that exceeded the amount asked by 2.6 times, instead of 2.62 times during the last similar auction. This development doesn’t mean of course that the country is self sufficient in financing its debts, but it is a good sign that investors do not fear a Greek bankruptcy, at least not in the short term. In any case, the offers must have come from the Greek commercial banks, which received last week an injection of liquidity of €28bn from the European Financial Stability Facility, as an advancement of the approximately €48bn recapitalisation exercise in favour of the Greek lenders, to be realised over the next few months.

This money will be coming from the EU-ECB-IMF troika, which is the only source of new loans for Athens. The recapitalisation of the banks will take place irrespective of what government the newly elected Parliament may or may not produce, and be dissolved. In any case the Greek lenders find it a good business to lend their government money at 4.69%, having themselves paid almost nothing for it.


In any case it is not only the liquidity of the Greek banks that needs a lot of support, but more so the cash-flow of the Greek government which is at stake.

As things stand now, the Papademos government, which still runs the country as a caretaker administration, only recently signed the second memorandum of understanding (MoU) with Greece’s official lenders, namely the EU-ECB-IMF. However, Athens is expected to apply more austerity policies to go with the new soft loans, and it was exactly this Greek voters rejected last Sunday in a legislative election, which changed all together the political scenery in the country.

Not forgetting that Greece, after three years of austerity and recession, has lost at least 15% of its incomes and production. Consequently, the political parties that brought the country to the present dead end were penalised by citizens, who voted en mass for those who reject the additional austerity measures. Given this, whatever government is formed from this new Parliament or from the one that might be brought about after a probable new legislative election on 10 or 17 of June, the austerity programme provided by the MoU, will be rather impossible to be applied.

The victory of François Holland in the French presidential race and his promises for a new growth-led overall policy mix in Eurozone, is actually going the same way as the rejection of the more austerity/recession prospects the Greeks just choose. It is not an exaggeration to say that the results of the Sunday elections in France and Greece are bound to force Brussels and Berlin to change their course too. Incidentally, the outgoing president of the Eurogroup, Jean-Claude Juncker, speaking on the ZDF network said that Europe must focus now on growth and used the case of Greece, to stress the results that continuous austerity policies may have on the political structure. He added, “we have to give hope. The election results in Greece shows us what can happen without hope. We got to solve this dilemma”.

On this same lines, on the need for growth policies, the usually careful head of the IMF, Christine Lagarde, appeared positive for relaxed measures in case of countries in recession. He said, “with the wrong policies we run the danger to lose one whole decade of growth, one whole generation of young people and miss the opportunity to place the world economy on a safe base”. Both those policy makers hold in their hands very important policy instruments and their comments are not to be taken as a mere analysis, but down to earth policy proposals. In Germany however the economic policy narrative changes. The Federal Minister of Economics, Wolfgang Schauble, speaking today (8 May) to the ARD network said that Germany will not renegotiate the Fiscal Pact and he added that he is convinced that France, under the new leadership, will follow the same policy. He knows for sure, however, that Paris is going to ask for at least a growth enhancing addendum to the Fiscal Pact. So his remarks can be read in the inverse and be interpreted as a readiness to discuss the new Paris proposals.

If one adds to that yesterday’s insinuation by Chancellor Angela Merkel that Germany might accept the drafting of an additional ‘Growth Pact’, then it is easily understood that policy directions are about to change in the Eurozone. Already the President of the European Union, Herman Van Rompuy, has announced an extraordinary European Summit with the 27 leaders on 23 May to discuss those matters.

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